One former employee of Susquehanna International Group LP (“SIG”) and another from KCG Holdings, Inc. were criminally charged in federal court with offenses related to the alleged theft of trade secrets from their former employers. In one action last week, Dmitry Sazonov was criminally charged for his alleged attempted theft of proprietary computer code for an SIG trading platform; while in the other, Zhengquang Zhang was criminally charged on April 7 for his alleged theft of proprietary computer code regarding algorithmic models and the trading platforms of KCG. Both cases were initiated by the US Attorney’s Office for the Southern District of New York. According to the complaint against him, Mr. Sazonov was employed as a software engineer by “Firm-1” from July 2004 through February 6, 2017 (“Firm 1” is associated with SIG through Mr. Sazonov’s LinkedIn profile). After he learned that a fellow employee had left SIG on February 3, Mr. Sazonov purportedly copied and converted SIG proprietary source code to PDF format, and subsequently appended separate pieces of the newly created PDF file to innocuous documents and files on his company desktop computer. He then repeatedly attempted to obtain these documents and files after he was later terminated by SIG on February 6. In the second action, Mr. Zhang, a technician employed by KCG from March 2010 through March 2017, was alleged to have stolen proprietary source code and transferred it to an external third-party development site, and also to have accessed the computer desktops of other KCG employees remotely without permission. (Mr. Zhang can also be tied to KCG through his LinkedIn profile.) If convicted, both Mr. Sazonov and Mr. Zhang could be subject to imprisonment up to 10 years and a fine of US $250,000.

My View: When Regulation Automated Trading was first proposed by the Commodity Futures Trading Commission in November 2015, one of the greatest objections was that persons likely subject to the regulation would have to provide to the Commodity Futures Trading Commission and the Department of Justice, upon request and without subpoena, proprietary source code related to their trading systems. The CFTC endeavored to make this requirement more palatable in a November 2016 supplemental proposal by subjecting any request for source code by the CFTC to a heightened process of review. (Click here for background on Regulation AT and the supplemental proposal in the article “Proposed Regulation AT Amended by CFTC; Attempts to Reduce Universe of Most Affected to No More Than 120 Persons” in the November 6, 2016 edition of Bridging the Week.) However, even the revised proposal was widely criticized as inadequate. As current Acting Chairman of the CFTC, J. Christopher Giancarlo said at the time, “The Supplemental Notice before us today … would strip owners of intellectual property of due process of law” by not requiring production of source code solely by a subpoena. “Abrogating the legal rights of property owners is not assuaged by imposing a few additional procedural burdens on the government agency seizing their property.” Even if the defendants in the two criminal actions filed last week are ultimately exonerated, the criminal charges against them provide a fresh reminder of how surreptitiously source code can be stolen, and why it is so important that owners of source code have a say before an objective tribunal in how it might be produced to the government when required by law.